Pakistan was on par with Vietnam and Costa Rica in 2005 in terms of exports. Both those countries have pulled ahead.
Exports are based on Total Productivity Factor. Total Productivity Factor is based on 3 things:
- Currency Appreciation against the dollar
- Foreign Direct Investment
- Import Duties
Currency
Pakistan has an advantage in that sector because of the recent depreciation. And producers of undifferentiated products, like rice, increased their exports. However, differentiated products require existing relationships, which Pakistani producers were not able to do. This factor is nullified if your costs are in Dollars as well.
FDI
No country in Pakistan’s category in 2000’s(Vietnam, Costa Rica,etc.) has increased their exports without the Foreign Direct Investment. Pakistan’s biggest challenge was the image for violence. While that has been resolved to a large extent, Pakistan still has a terrible reputation in ease of doing business metrics, regulation, legal issues, etc. that discourage foreign investors.
Import Duties
Import Taxes are Export Taxes. This is counter-intuitive, but true. Import duties harm exports in 2 ways:
- Import Duties cuts off foreign made goods for the local markets, so local producers invest more resources in fulfilling local demand. This decreases the incentive to export.
- Import duties removes competition in the local market, but they also make local producers non-competitive in foreign markets. Without competition, local industries have no reason to innovate. Anybody who has eaten Pakistani candy would attest to this.
Global Value Chain
The Global Value Chain is the way goods are produced now. An iPhone, example, is designed in the US, with the raw materials from Africa, the semiconductors from China, the screens from Korea, etc. Most finished goods are manufactured through a web of global suppliers. Pakistan does not figure well in this value chain. Pakistan is not a member of Trade Bloc like ASEAN or NAFTA/USMCA, due to being part of a rough ‘neighborhood’. But Pakistan also doesn’t have a bilateral agreements with anyone in these large trading blocs.
Sectors for improvement
Pakistan is already a premium exporter of Rice. Pakistan also has an opportunity in Halal Meat. Textile are Pakistan’s biggest exports, but they are hampered in a big way; Import duties on man-made fibers and equipment. Garments made with synthetic microfibers are the fastest growing sectors, due to Athletic Wear boom.
References
- Lerner Symmetry Theorem. on the correlation between import tariffs and export tariffs.
- The Great Convergence by Richard Baldwin on the Global Value Chains.